Investments: Environmental, Social and Governance Criteria

Question

Asked by

To ask Her Majesty’s Government what assessment they have made of the level of demand for investments that are advertised as meeting Environmental, Social, and Governance (ESG) criteria; and what steps they are taking, if any, to ensure that such investments are in line with (1) the United Nation’s Sustainable Development Goals, and (2) the Paris Agreement on climate change.

My Lords, demand for sustainable finance is growing rapidly. Some 49% of UK-managed assets now integrate ESG factors, and there is strong demand from consumers and investors for such assets. The Government are committed to ensuring that this growing market is well regulated and that the UK is the best place in the world for sustainable finance. That is why the Government have taken world-leading action to green our financial system, safeguard consumer interests and prevent greenwashing.

I thank the noble Baroness for her Answer. I know that she is aware of the recent article in the Financial Times, entitled “ESG: the next mis-selling scandal?” This suggested that there were strongly misleading claims being put on financial products labelled as green, sustainable, ESG, et cetera. Does the Minister agree that no product should be so labelled if it is not compliant with the Paris and, indeed, Glasgow climate agreements, international biodiversity treaties and the sustainable development goals? Given that report and many others, do the Government not need to act urgently to ensure that there is adequate regulation or legislation to make sure that people are actually getting what they believe they are putting their money into?

The noble Baroness is absolutely right. That is why the UK is developing an economy-wide regime for ESG disclosure, focusing in the first instance on those requirements related to climate change. Alongside that, the FCA is creating a consumer-facing label, so that consumers seeking to invest in ESG products know what they are investing in and that it meets the high standards that they would expect.

My Lords, is the Minister aware of the comments made yesterday by the chair of the US Securities and Exchange Commission? He said of the ESG funds:

“When I think about these questions, I’m reminded of walking down the aisle of a grocery store and seeing a product like fat-free milk … in that case you can see objectives figures like grams of fat … Investors should be able to drill down and see the ingredients underlying these funds.”

What activity is the FCA taking to ensure that such detail is provided? Is there co-ordination with the Securities and Exchange Commission in the United States?

On the point about co-operation with the United States, I will have to check and write to the noble Lord. On the FCA, in addition to developing this consumer-facing label so that people can, with transparency, understand what they are investing in, it is also looking at the question of regulating the firms and providers that look at ESG ratings and providing that information also.

My Lords, I commend the Government on their commitment to green finance and on encouraging sustainable investing. Following on from the previous Question by the noble Lord, Lord Haskel, will the Minister tell us what assessment the Government have made of the impact in terms of climate change of the so-called mining of cryptocurrencies like bitcoin, which, in itself, seems to have caused more greenhouse gas emissions per annum than many countries over the last year or two? Are the Government concerned about the sustainability of crypto from that perspective?

The noble Baroness is absolutely right. We are aware of the huge energy use that can be involved in these currencies. The UK is developing a green taxonomy, which will make us the first country in the world to make disclosures aligned with our Paris and other commitments mandatory economy-wide, including the financial-services sector. That will bring transparency over the climate impacts of firms’ activities and allow the market and consumers to respond accordingly.

My Lords, in recent days, we have seen a variety of organisations announce their intention to divest from investments in, or associated with, Russia. This is a welcome response to Vladimir Putin’s ongoing and flagrant breaches of international law in Ukraine. While it is not for government to dictate how private organisations invest their money going forward, what steps are Ministers taking to promote investment opportunities that are greener, socially responsible and likely to be of long-term economic benefit to the UK, as well as our friends and neighbours?

The work that we are doing to green finance and green our economy means that there will be far greater transparency on the impact of firms on climate change and the wider environment. This will allow firms to make those kinds of decisions. The noble Lord talked about divestment. In terms of our approach or view on that with regard to climate activities, we expect investors to use SDR disclosures to integrate climate into stewardship activities. That may eventually lead to divestment, but beforehand, they may use their position as investors in major companies to encourage them to greener positions before considering divestment altogether.

My Lords, I declare my interest as an adviser to Banco Santander and apologise because I probably should have mentioned that when I spoke on the previous Question. Can my noble friend clarify, in the Government’s approach to the green taxonomy and ESG, how nuclear and certain types of gas power stations will be classified? Will they be classified as green and environmental?

My Lords, the Government set up a specific panel to look at those very questions, and I cannot pre-empt the outcome of its work.

My Lords, I declare my interests as set out in the register. I understand that the noble Baroness cannot prejudge what the panel will say on the green taxonomy. However, does she agree that it is essential, if that taxonomy is to be useful both in this country and internationally, that it is both science- based and free of vested interests?

Yes, I agree with the noble Baroness on that point. I think the approach that the UK has taken to date to this whole area meets that test and will continue to do so.

The director of the think tank InfluenceMap said about the same FT article to which the noble Baroness, Lady Bennett, referred, that if you label something that invests in fossil fuels “sustainable”, and there is a whole body of scientific opinion that new gas, oil and coal production is incompatible with net-zero targets, there is probably quite a good chance that the fund is being mis-sold in some way. Does the Minister agree that a legal definition of greenwashing is urgently needed to prevent mis-selling of financial products?